Normalising of Sovereign Debt Markets ‘Could Take Years’

Measures outlined in the 29 June statement by euro area leaders at the Brussels summit will reduce near-term risks of deposit runs or credit market shutdowns, said Moody’s Investors Service in a report assessing the outcome.

In the report, entitled ‘European Sovereigns: Post-Summit Measures Reduce Near-Term Likelihood of Shocks, But Integration Comes at a Cost’, the credit ratings agency (CRA) said it believes the statement confirms that policymakers are inclined to take the necessary steps to avoid the severe and profoundly credit-negative downside scenario of a gradual unravelling of the euro area through additional defaults and/or an exit.

However, Moody’s also cautions that the path of gradual policy developments towards closer fiscal integration carries a high cost, as those euro area countries that are effectively supporting the others will continue to face an increase in their contingent liabilities which will, in turn, weaken their creditworthiness. It also believes that given the continued reactive nature of policy decisions, the normalisation of sovereign debt markets could take a number of years with the risk of policy accidents and rising sovereign defaults the longer the crisis persists.

Separately, Standard & Poor’s (S&P) said that some relief could be in sight for sovereigns in the eurozone following the agreements reached at the summit on 29 June, which could help to stabilise the region and staunch any further weakening of sovereign creditworthiness.

However, S&P added that the risks associated with implementing these measures are significant, and it is unclear whether policymakers will be able to build on the agreements. As a result, the agreements reached at the summit have no immediate implications for S&P’s sovereign ratings in the eurozone.